Germany's 2027 Tax Reform: What's Actually Changing, and What Isn't Yet
On 2 July 2026, Germany's coalition government agreed a 34-point reform package covering tax, labour, and bureaucracy, with an income tax reform at its centre. If it passes the Bundestag and Bundesrat as planned, it takes effect from 1 January 2027 and reaches full effect in 2028, worth about €10 billion a year in relief once fully phased in. It hasn't been voted into law yet, and the exact numbers could still shift during the legislative process, but the shape of the reform is clear enough to be worth understanding now, especially if you're planning finances around a 2027 salary.
It's agreed, not passed
Worth saying plainly before anything else: this is a coalition committee agreement, the kind of political deal that precedes a bill, not a law itself. It still needs to go through the Bundestag and the Bundesrat before it takes effect, and the government has said some of the exact figures will be finalised during that legislative process or once an official report on the minimum subsistence level is available. Chancellor Friedrich Merz's coalition has described it as a meaningful step rather than a sweeping overhaul, and even coalition partners have characterised it as incremental rather than dramatic.
MyPayCalc's Germany calculator currently reflects the confirmed 2026 rules: a €12,348 basic allowance (Grundfreibetrag) and the existing bracket structure. None of what follows is live yet, and we'll update the calculator once the reform is actually signed into law rather than while it's still a proposal.
The three allowances going up
Relief for low and middle earners comes mainly through three allowances rising in stages through 2028. The basic tax-free allowance (Grundfreibetrag), currently €12,348, is expected to rise in two steps to €12,900 by 2028. The employee lump-sum deduction (Arbeitnehmerpauschbetrag), the flat amount automatically deducted from taxable income to cover work-related expenses without needing receipts, is expected to rise by €200 to €1,430. Child benefit (Kindergeld) is also set to rise in two stages to €272 a month per child by 2028, up from €259 today, alongside a corresponding increase to the child tax allowance (Kinderfreibetrag).
None of these are dramatic increases on their own, a few hundred euros here and there, but they compound. The government's own estimate is that a family of four with two average incomes and combined household income around €60,000 would be better off by more than €600 a year once the reform is fully phased in by 2028, compared with today's rules.
A flatter curve in the middle, a new band at the top
The reform also aims to flatten what's known as the second progression zone, the part of the German tax curve where the rate climbs steadily from 14% up toward 42% as income rises. A flatter climb through that zone means less of a jump in marginal rate for people moving up through mid-level salaries, though the government hasn't yet published the exact revised thresholds for where that zone starts and ends.
The relief for lower and middle incomes is being partly financed by higher tax on the very top. Currently, the top marginal rate of 45% (the so-called Reichensteuer, or 'rich tax') applies from a taxable income of €277,826. Under the proposal, that gets split into two bands: 45% starting at a taxable income of €250,000, and a new 47% band starting at €280,000. In practice, this means the 45% rate kicks in earlier than it does today, and a genuinely new top rate appears above €280,000 for the first time.
Coalition agreement from 2 July 2026, pending Bundestag and Bundesrat approval. Figures are taxable income (zu versteuerndes Einkommen), not gross salary.
Two smaller changes worth knowing about
The flat-rate tax employers pay on mini-jobs, the low-hours, low-pay roles capped at €556 a month, is set to rise from 2% to 5%. That's a cost that mostly falls on the employer rather than showing up as a deduction on the mini-jobber's own payslip, but it raises the cost of employing someone on a mini-job basis, which is worth knowing if you run a small business or work multiple part-time roles.
Separately, the tax deduction for craftsmen's services, the relief homeowners can claim for the labour cost of home renovations and maintenance, is being reduced from 20% to 15% of the qualifying cost. It's a small detail compared to the headline allowance increases, but it's part of the same package and part of how the relief for lower incomes is being funded elsewhere.
What to actually do with this now
If you're budgeting for 2026, nothing here changes your numbers. The current Grundfreibetrag, brackets, and social contributions are what actually apply to your paycheck this year, and MyPayCalc's Germany calculator already reflects them. If you're planning further ahead, for a 2027 salary negotiation, a relocation, or a family budget that assumes a certain net figure, it's worth treating these numbers as directionally likely rather than locked in, since coalition agreements in Germany have been renegotiated before between agreement and passage.
The practical takeaway is straightforward either way: low and middle earners are on track for a modest but real improvement in take-home pay by 2028, phased in gradually rather than all at once, funded partly by a genuinely new top rate for the small number of taxpayers earning above €280,000. We'll update the German calculator with the finalised figures as soon as the legislation actually passes.